Both Bond Bill and Bond Ted have 11.0 percent coupons, make semiannual payments,

Question

Both Bond Bill and Bond Ted have 11.0 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has 20 years to maturity.

Hint from Dr. Gross: To calculate the percent change in the price of a bond, you must calculate the price of the bond twice. Two bonds in this question means four price calculations. Two rate changes meanseight price calculations.

Please create an Excel Spreadsheet Calcualtor that computes the price of a bond as a function of the inputs. Then copy the calculator to make eight bond price calculators.  

Also be sure to note which bond (the longer or shorter maturity bond) has the greater percent-change in price.

If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? (Do not include the percent signs (%). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of these bonds? (Do not include the percent signs (%). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

Both Bond Bill and Bond Ted have 11.0 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has 20 years to maturity.

Hint from Dr. Gross: To calculate the percent change in the price of a bond, you must calculate the price of the bond twice. Two bonds in this question means four price calculations. Two rate changes meanseight price calculations.

Please create an Excel Spreadsheet Calcualtor that computes the price of a bond as a function of the inputs. Then copy the calculator to make eight bond price calculators.  

Also be sure to note which bond (the longer or shorter maturity bond) has the greater percent-change in price.

Explanation / Answer

Pbill=40x (PVIFA 5%,6)+1000(PVIF 5%,6) =949.24

PTED=40x (PVIFA 5%,40)+1000(PVIF 5%,40) =828.41

PERCENTANGE CHANE

Pbill %=(949.24-1000)/1000=-.0508=-5.08%

PTED %=(828.41-1000)/1000=-.1716=-17.16%

Pbill=40x (PVIFA 3%,6)+1000(PVIF 3%,6) =1054.17

PTED=40x (PVIFA 3%,40)+1000(PVIF 3%,40) =1231.15

PERCENTANGE CHANE

Pbill %=(1054.17-1000)/1000=.0542=5.42%

PTED %=(1231.15-1000)/1000=-.2311=23.11%

LONGER THE MATURITY OF A BOND , THE GREATER IN IST PRICE SENSITIVITY TO CHANGE IN INTEREST RATES

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